India may introduce a digital version of its currency, the rupee, as early as this year, in a bid for a “more efficient and cheaper currency management system”.
During the Budget speech for 2022-2023 (the Indian Government’s financial year runs from 1st April to 31st March), Indian finance minister Nirmala Sitharaman also announced that the country is planning to tax income from digital assets at 30 per cent, India’s highest tax band.
The tax would also apply to gifts of digital assets, with recipients being liable to pay the levy. Taxes for all other transactions would be deducted at source.
Ms Sitharaman said the introduction of a central bank digital currency would “give a boost, a big boost, to the digital economy”, adding that the magnitude and frequency of digital asset transactions “have made it imperative to provide for a specific tax regime”.
India is currently on a drive to demonetise the economy, with 500 rupee and 1,000 rupee banknotes removed from circulation in 2016.
Central Bank Digital Currencies (CBDC) are gaining popularity around the world, with China trialling a digital yuan and the UK exploring similar options.
In November 2021, the Bank of England said it would hold a formal consultatio on the topic in 2022, to decide whether to move forward with ‘Britcoin’.
However, it said that the “earliest date for launch of a UK CBDC would be in the second half of the decade,” describing it as a “major national infrastructure project”.
China is is moving faster with its digital yuan, which launched in a pilot trial in 2020. By the end of 2021, over 200 million people had used the digital yuan, with the Beijing Olympics presenting the first time foreigners interact ith the system.
However, Ms Sitharaman was clear about India’s ambitions to be “the first” to introduce the wide rollout of a national digital currency.
A 2021 survey of central banks conducted by the Bank for International Settlements (BIS) found that 86 per cent were actively researching the potential for CBDCs, 60 per cent were experimenting with the technology, and 14 per cent were deploying pilot projects.
CBDCs can take several different forms and uses and can be built on different technologies.
The motivation to experiment with CBDC has multiple factors, including a desire to meet the public’s need for digital currencies, as evinced by increasing use of private virtual currencies.
Another factor is the settlement risk inherent within the current financial system. CBDCs. The Reserve Bank of India notes that transactions using a CBDC are akin to the transfer of cash, removing the need for interbank settlements.
“CBDCs would also potentially enable a more real-time and cost-effective globalisation of payment systems. It is conceivable for an Indian importer to pay its American exporter on a real time basis in digital Dollars, without the need of an intermediary.
“This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Time zone difference would no longer matter in currency settlement.”
The Budget speech also saw the announcement of increased infrastructure spending and extended credit guarantees for struggling small businesses in an economy that has been hit hard by the COVDI-19 pandemic.
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